First Natural Gas Price Hike In 18 Months May Not Aid ONGC, Oil India
Domestic prices of natural gas are expected to rise for the first time in over 18 months in April as the government implements price hikes.
Analysts, including Urvisha H Jagasheth, research analyst at CARE Ratings; and Probal Sen, oil and gas analyst at Centrum Broking, expect the cleaner fuel’s price to rise 6% over the last six months to $1.9 per metric million British thermal units under the bi-annual administrative price mechanism.
Macquarie, however, expects gas prices to rise further in the next fiscal. “According to the present gas price formula, domestic gas prices are expected at $2.2 per mmBtu in FY22,” the brokerage said in a report, which provides projections for the full year of FY22.
The hike will be driven by higher prices of the fuel during winter months, according to Jagasheth. “From August 2020, there has been a recovery in prices of natural gas, especially during the winter months which will reflect in computation of domestic gas price for the first half of FY22.”
The APM gas price is calculated using a formula that considers the volume-weighted annual average prices of four global benchmarks—U.S. Henry Hub, Canada Alberta, U.K. NBP and Russian Natural Gas—with a lag of one quarter. The price arrived at using the formula is revised bi-annually.
The APM price for the second half of the ongoing fiscal was cut by 25% to a record low of $1.79 per mmBtu.
At the same time, price of natural gas produced from discoveries in deep water, ultra-deep water, and high-pressure or temperature, also known as gas from difficult fields, was slashed by over 27% to $4.06 per mmBtu. Since the advent of the new formula under New Domestic Gas Policy-2014, the prices of domestic APM natural gas have fallen over 64%.
Impact On ONGC
Emkay Shares and Stock Brokers said in a February note that ONGC’s production cost is $3.5-3.7 per metric million British thermal units, making gas exploration not lucrative for upstream companies like it.
The company has sought market-based gas pricing and is optimistic about a floor price that would at least compensate operating expenditure. “Change in gas pricing policy for APM fields, which allows for some sort of floor pricing v/s current pricing regime under which gas prices have fallen sharply will be a potential catalyst for ONGC,” JPMorgan said in a report.
Cumulative production by ONGC, India’s largest gas producer, during April 2020-February 2021 was 20,040.2 million metric standard cubic metres—8.63% lower than its target, and 8.24% lower than a year ago.
This means lower gas rates will affect its earnings. “For every $1 per mmBtu change in gas price, the profit before tax of ONGC and Oil India is affected by Rs 4,300 crore and Rs 550 crore, respectively,” Prashant Vasisht, vice president and co-head of corporate ratings of ICRA Ltd., told BloombergQuint over email.
“The upcoming price revision will have a negligible impact on the gas producers as the price increase will be marginal,” Sen said. “However, such a nominal increase in gas price will be beneficial for gas consumers like city-gas distributor companies as their pricing power will continue to remain high.”